I run headfirst into this issue. It never gets easier.
An individual 401(k) investor who follows a risk score. Generated from an online questionnaire from their 401(k) provider.
All I have to go on are the following facts.
My doctor never determines my risk score. He reads the latest tests. And determines if any change in diet or activity is required. Or medication.
Same with my dentist. X-rays never lie. You either take care of your teeth or you don’t.
My auto dealership know nothing about risk scores. They change the oil, rotate the tires, and fill the anti-freeze in the fall. As they see fit.
Why—or how—does a risk score improve 401(k) mutual fund selections?
Or manage stock and bond market risk?
Let’s face the facts.
Your menu of 401(k) mutual funds have been picked for you.
You have to “make lemonade out of the lemons.”
And not give back all your stock market investment gains every few years. Along with your personal and company-matching 401(k) contributions.
I have two kids in their mid-20’s. Newer 401(k) investors. Each has had to figure out “what to buy” in their 401(k) recently.
Those 20-year-old can own the same target date mutual fund as someone a year away from retirement.
Where is the risk management in that?
Diversification, asset allocation, and dollar cost averaging. Checks all the boxes for the most popular mutual fund industry jargon and propaganda.
None of those elements solve “what to buy.” And they don’t provide a 401(k) principal preservation strategy.
Individual 401(k) mutual funds have to be that. Individual. Chosen to fit individual investor risk tolerance.
401(k) risk score tries. But fails. Because it does not pick the handful of best 401(k) mutual funds to own at any given time.
And provides no investment management strategy. When the stock risk levels change.
401(k) mutual funds need to be analyzed in the following order.
Annual cost. Recent investment performance. Ranking versus other available mutual fund options.
When chosen, 401(k) mutual funds have to be managed.
Based on changes to asset class and stock market risk.
In all these elements, risk score is nowhere to be found.
Ric Lager
Lager & Company, Inc.
There is no need to continue to guess with your 401(k) mutual funds. All you need is a second opinion. You deserve it.
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